Here’s Why Your Social Security Break-Even Age Is So Vital

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While nearly everyone looks forward to a comfortable and relaxing retirement, navigating your Social Security benefits can be challenging. One of the biggest hurdles for folks planning their retirement is deciding when to stop working and when to start claiming Social Security benefits. Thankfully, Silvur, a free retirement planning app, helps you calculate the best possible time for you to elect your Social Security benefits, based on factors including your age, marital status, overall financial situation and more.

Another factor to consider when deciding when to collect Social Security benefits is your break-even point. Your break-even point is the moment in your life when the amount of money you'd receive by choosing to take your benefits earlier (at a reduced rate) becomes equal to the total benefits you would have received if you delayed taking your benefits. It might seem as if it won't make financial sense to wait to elect your benefits since the larger paycheck you'll receive by delaying benefits won't offset the income you missed by waiting. However, it will make a difference if you predict that you'll have a longer life. If you elect too early, you may lose out on larger benefits once you hit your break-even age point.

Calculating your break-even point can help you decide when to retire and start taking your benefits. And with Silvur, it’s never been easier. Simply input your current salary, your current age, your planned retirement age and your marital status, and voila! You can then adjust your planned retirement age to see exactly when your total Social Security benefit amount will be the highest. As you raise your planned retirement age on the calculator, you’ll notice that, at a certain age, your lifetime benefits will be lower, depending on your longevity estimate. That’s your break-even point.

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How Do Social Security Benefits Work?

Your Social Security benefits are calculated based on the average of your top 35 earning years, up to an annual cap (currently $137,000). That means anything you earn over that won’t be included in the calculation of your Social Security benefits. Full retirement age — which ranges from 65 to 67 — is the age at which you’re able to collect 100 percent of the Social Security benefits you’ve accumulated throughout your lifetime.

After age 62, you can elect to begin collecting your benefits before you reach full retirement age. The downside to this is that if you begin taking Social Security before your full retirement age, you’ll receive a permanently reduced benefit. For example, if you choose to begin taking Social Security at age 62, your benefits will be reduced by as much as 25 to 30 percent.

On the other hand, you don’t have to start collecting benefits as soon as you reach full retirement age. Instead, you can choose to delay your benefits, which means you’ll receive more money each year later on. For every month you don’t take Social Security until you turn 70, you’ll earn what’s known as a delayed retirement credit, which can increase your benefit by up to 8 percent a year. However, it's important to remember to calculate your break-even point to determine when you should elect your benefits — if you don’t, you may be leaving money on the table. There’s also no additional benefit for waiting longer than age 70 to cash in, since after that you’ll no longer receive delayed retirement credits.

If you’re in poor health, or your longevity estimate is on the shorter side, it might not make sense for you to delay collecting benefits at all, because you may pass away before you hit your break-even age.

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How To Calculate Your Social Security Break-Even Age

If you’re deciding when you should elect your Social Security benefits, you should calculate your Social Security break-even age in order to determine the right time to elect your benefits. First, determine when your full retirement age (FRA) is. Let’s just say you were born 1961, so your FRA is 67. Then run through two different scenarios: at 62 (when you can start to collect) and at full retirement age, 67.

Let's assume that in this scenario, your full monthly benefit at FRA is $1,000.

• You elect benefits at 62, reducing your benefits by 30 percent, making your benefits $700 a month. Your annual income is now $8,400.
• You already received a total of $42,000 before your FRA or five years of income ($8,400 x 5 = $42,000).
• If you waited to elect at FRA, your annual income would be $12,000, where you’ll receive an additional $3,600 a year.

Now, you take your total earnings that you received ($42,000) for that five-year period before your FRA. Then, divide it by the additional income you would have received at FRA (which is $3,600) and add it to your FRA (67) to get your break-even age. Your break-even age is 78 and eight months ($42,000 ÷ $3,600 = 11.67 years + 67 = 78 years and 8 months).

By calculating your break-even age, you can determine other factors like health or longevity to see if electing your benefits before or after your full retirement age makes sense.

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Will Social Security Still Be Around When I'm Ready To Retire?

If you’re wondering whether Social Security will still be around when you’re getting ready to retire, that’s understandable. In short, it’s very likely. “Social Security is a program that’s critical for most Americans’ retirement,” Rhian Horgan, CEO of Silvur, explained. “While there may be changes to help adequately fund it, we don’t believe it’s going anywhere.”

Social Security provides benefits to a whopping 50 million people, and is paid for by payroll taxes from over 150 million workers and their employers, according to the Social Security Administration. Future changes to the mechanisms and processes of Social Security are almost a certainty, since the program has constantly evolved to reflect the wants and needs of each new generation since 1935.

The Social Security Board of Trustees also projects that “changes equivalent to an immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.”

Should You Wait Until Age 65 To Collect Social Security Benefits?

Waiting until you’re 65 (or later) to collect your benefits might seem like the best course of action if you’re looking to receive the most money possible later on. However, your health and estimated life expectancy are both key factors to consider when making this decision. While it’s certainly not everyone’s favorite subject to discuss, if you’re in poor health and don’t expect to live into your 70s or 80s, it may make sense to take benefits earlier. Conversely, if you’re in great health and expect to live for another 20 years, waiting to collect Social Security is definitely something to consider.

Your marital status will also help determine when you should start taking benefits. Qualifying for Social Security spousal benefits depends on whether you're currently married, divorced or widowed. If you do qualify, Silvur can project your lifetime benefits, as they vary from case to case.

Horgan notes that folks who have already begun taking their benefits shouldn’t feel as if they missed out on savings, and that there’s still time for them to earn delayed retirement credits and increase their benefits later on. “If you’ve reached full retirement age and are collecting Social Security benefits, you can pause them for one time only,” she said. “This is SSA giving you a ‘hit reset’ button. The good news is that if you take this option, you’ll continue to earn delayed retirement credits until you turn 70, which will increase your monthly benefit.”

The Bottom Line

Planning for retirement doesn’t have to be difficult. With Silvur’s free, easy-to-use app, you can quickly calculate your break-even point, project your lifetime income, analyze your expenses, evaluate your net worth and decide when to retire and when to start taking your benefits.

Stop Stressing Over Retirement And Download Silvur Today

Sources:
Silvur: Wake-Up Call with Katie Couric Q＆A: Taking Charge of Your Social Security Benefits
Silvur: When Should I Take My Social Security Benefits?
Silvur: Should You Retire at the Same Time as Your Spouse?
Silvur: 3 Real-Life Social Security Benefits Examples